Aggregate Planning At Inline Industries

Aggregate Planning at In-Line Industries In-Line Industries (ILI) produces recreational in-line skates. Demand is seasonal, peaking in the summer months.

In-Line Industries (ILI) specializes in manufacturing recreational in-line skates, which experience highly seasonal demand, peaking during the summer months. Effective aggregate planning is crucial for balancing production, inventory, and workforce levels to meet fluctuating customer demand while controlling costs and maintaining high service standards. As a consultant, the goal is to compare two common aggregate planning strategies—level and chase—and evaluate their suitability for ILI over an eight-month planning horizon, taking into account both financial and operational considerations. Additionally, the analysis aims to explore whether an alternative plan that minimizes costs beyond the traditional approaches exists.

Introduction

Aggregate planning is a critical process that helps firms align their production and demand forecasts through strategic decisions involving workforce levels, inventory management, and production rates. The choice between a level approach, which maintains a steady output and workforce, and a chase approach, which adjusts production to match demand, depends on the specific characteristics of the business environment, such as seasonal demand, costs, and service level requirements. This report reviews both plans in the context of ILI's seasonal demand pattern, evaluates their costs, and considers qualitative factors influencing the decision. A detailed comparison follows, culminating in a recommendation and an exploration of potential alternative strategies for cost savings.

Data and Assumptions

  • Forecasted Demand (pairs): March 900, April 1500, May 2500, June 3000, July 1400, August 1000, September 600, October 400
  • Initial inventory: 500 pairs
  • Target inventory at end of October: 1000 pairs
  • Workforce: 6 employees, each produces 220 units/month in regular time
  • Labor costs: $15 per unit (regular), $20 per unit (overtime)
  • Hiring cost: $1200 per employee
  • Firing cost: $600 per employee
  • Inventory holding cost: $2 per unit/month
  • Backorder cost: $10 per unit/month
  • Production capacity (regular): 6 employees × 220 units = 1320 units/month

Analysis of the Level Strategy

The level strategy involves maintaining a consistent production rate throughout the planning horizon, regardless of fluctuations in demand. To implement this, ILI would produce at a steady rate and manage the inventory to absorb demand variability. The key steps involve determining the average demand, setting a production level, and adjusting inventory accordingly.

Calculating Steady Production Rate

The total demand over the 8 months is 10,900 pairs. With an initial inventory of 500 and an end inventory target of 1000, the net demand to be met through production and inventories is 10,900 - 500 + 1000 = 11,400 pairs. Spread evenly over 8 months, the average demand is approximately 1,425 pairs per month.

To produce this uniformly, ILI can produce 1320 units/mo (capacity of current workforce) in regular time, slightly less than the average demand. Therefore, the company must utilize overtime to meet excess demand or adjust workforce through hiring or Firing.

Cost implications

This approach will incur inventory holding costs for surplus inventory during low-demand months (July, August) and potential backorders during periods of excess demand (June). The regular production capacity is slightly below the average demand, which suggests that overtime or incremental hiring might be necessary.

Given these factors, the total cost components include regular labor, overtime labor, inventory holding, and backorder costs, alongside hiring or firing costs if workforce adjustments are made.

Analysis of the Chase Strategy

The chase approach involves adjusting production output each month to exactly meet demand, minimizing inventory and backorders. This strategy results in fluctuating workforce levels, requiring hiring in high-demand months and firing during low-demand months.

Workforce Adjustment

During peak months (May and June), additional employees are needed to meet demand. Conversely, during low-demand months (October, September), workforce reduction is necessary. The costs of hiring and firing, along with variable labor costs, influence the overall cost structure.

Cost implications

The chase strategy minimizes inventory and backorder costs but can incur significant hiring and firing costs. It also introduces variability in workforce planning, which might be operationally challenging and impact employee morale and quality.

Cost Comparison and Non-Financial Considerations

Financially, the level plan is likely to have higher inventory holding costs but lower hiring/firing costs and less variability in workforce management. The chase plan minimizes inventory and backorders but could result in increased hiring and firing expenses and employee dissatisfaction due to fluctuating employment levels.

Non-financial factors include customer service quality and operational complexity. The level plan maintains consistent availability of products, contributing to a higher customer service level, while the chase plan's fluctuations could result in stockouts or excessive inventory at times, affecting customer satisfaction.

Similarly, a stable workforce under the level plan supports employee morale and reduces training costs, whereas the chase plan's fluctuating workforce might incur additional costs and disrupt operational stability.

Recommendation

Considering both the financial and qualitative aspects, the level plan appears more suitable for ILI owing to its influence on customer satisfaction, workforce stability, and predictable operations. Although it incurs higher inventory costs, the benefits of consistent service levels and employee morale outweigh these costs in a seasonal, demand-variable environment.

Exploring Alternative Cost-Effective Strategies

A potential alternative approach involves combining elements of both strategies, such as implementing a modified chase strategy with limited workforce adjustments and inventory buffer zones, or pursuing a tiered staffing plan that adjusts employment gradually. Additionally, subcontracting excess demand during peak months or investing in flexible manufacturing processes could reduce costs further.

Preliminary analysis suggests that a hybrid plan, which adjusts workforce minimally and optimizes inventory levels, might yield lower overall costs than pure level or chase strategies.

Further detailed quantitative analysis and simulations are required to quantify these savings, but such hybrid approaches offer promising avenues for cost optimization without compromising service levels.

Conclusion

Based on the analysis, the recommended aggregate plan for ILI is the level strategy, which balances production, costs, and customer service. However, exploring hybrid options that combine the stability of the level plan with the flexibility of a modified chase approach could provide additional cost savings and operational advantages. Future planning should also consider workforce flexibility investments and demand management strategies to further optimize costs.

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